Deficit looms for 2010-11

California budget deal still kicks can down road

Even the most cockeyed optimist in the state Capitol, if there is such a thing, would not contend that the much-revised California state budget that Gov. Arnold Schwarzenegger signed Tuesday is the final fiscal word.

Even Schwarzenegger, who usually puts a positive spin on events, was subdued, reminding reporters that "we are not out of the troubled waters yet" and pledging that "if our revenues drop further, (we will) make the necessary cuts in order to again live within our means."

Not that the revised 2009-10 general fund budget exactly "lives within our means."

The $84.6 billion budget is balanced on paper with dozens of accounting gimmicks, such as charging the June 2010 state payroll — about a billion dollars — against the 2010-11 fiscal year, and billions of dollars in supposed spending reductions, revenue and fund shifts that are, to say the least, dicey.

There is, for instance, the $1.2 billion cut in prison spending, about half of which assumes that the Legislature will go along with Schwarzenegger's plans to reduce the inmate population by 27,000 felons. It's so controversial, raising the specter of early releases or less supervision of parolees, that the Legislature deferred a decision until after its summer recess.

Or, to cite another example, there are billions of dollars in raids on local government and redevelopment agency funds that will be challenged in court. And there are deep cuts in health and welfare spending — including many that Schwarzenegger made unilaterally before signing the budget — that already are being contested.

There's a billion dollars in extra federal healthcare aid being counted on the revenue side that may not materialize. And there's another billion bucks from the supposed sale of the State Compensation Insurance Fund's book of business that may happen, but might not.

Those contingencies alone could punch holes in the budget approaching $10 billion. But wait, as they say in television sales pitches, there's even more downside risk.

The revised budget assumes that general fund revenue will approach $90 billion this year, thanks in part to some backdoor borrowing from taxpayers through accelerated tax payments and a boost in paycheck tax withholding. But the state's economy is continuing to decline and revenue has been dropping. No one would be surprised if that $90 billion figure is $5 billion too high.

Finally, even if all the spending cuts and gimmicks work exactly as planned, even if this year's revenue meets expectations, and even assuming the economy begins to recover in 2010, the administration now projects a 2010-11 deficit of $7 billion to $8 billion. But given the track record on such projections, the likelihood that many of the current assumptions will prove wrong and a strong possibility of continued recession, a deficit in the $20 billion range for Schwarzenegger's final budget would seem to be more realistic.